Answer to Question #66543 in Macroeconomics for Zac

Question

2) Consider the following statement in the short-run and the long-run: “The quantity theory of money (quantity equation) states than an increase in the money supply will lead to an equiproportionate increase in the price level”. Is this true or false? Explain.

Answer 1

False.

An increase in the money supply will lead to an equiproportionate increase in the price level only in the long-run. In short run wages and prices are sticky and increase in the money stock has temporary effect on GDP and employment.